Iron, copper, lithium, niobium, and gold.

Zero-Hedge says “watch for gold to plummet”…although this may be a bit pre-mature.

Subtanstial gold mines takes years to survey, and years more to bring to production, assuming there is a company willing to assume the risks of a war-torn area.

No…there are quite a few places where mining companies can operate without worrying about having workers captured and be-headed by a few lunatics in turbans.

I think it will be quite awhile, on the order of a decade, before the gold mines in Afghanistan affect the global gold price.

U.S. Identifies Vast Mineral Riches in Afghanistan

By JAMES RISEN

WASHINGTON — The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe.

An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and BlackBerrys.

The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists. The Afghan government and President Hamid Karzai were recently briefed, American officials said.

While it could take many years to develop a mining industry, the potential is so great that officials and executives in the industry believe it could attract heavy investment even before mines are profitable, providing the possibility of jobs that could distract from generations of war.

“There is stunning potential here,” Gen. David H. Petraeus, commander of the United States Central Command, said in an interview on Saturday. “There are a lot of ifs, of course, but I think potentially it is hugely significant.”

The value of the newly discovered mineral deposits dwarfs the size of Afghanistan’s existing war-bedraggled economy, which is based largely on opium production and narcotics trafficking as well as aid from the United States and other industrialized countries. Afghanistan’s gross domestic product is only about $12 billion.

“This will become the backbone of the Afghan economy,” said Jalil Jumriany, an adviser to the Afghan minister of mines.

American and Afghan officials agreed to discuss the mineral discoveries at a difficult moment in the war in Afghanistan. The American-led offensive in Marja in southern Afghanistan has achieved only limited gains. Meanwhile, charges of corruption and favoritism continue to plague the Karzai government, and Mr. Karzai seems increasingly embittered toward the White House.

So the Obama administration is hungry for some positive news to come out of Afghanistan. Yet the American officials also recognize that the mineral discoveries will almost certainly have a double-edged impact.

Instead of bringing peace, the newfound mineral wealth could lead the Taliban to battle even more fiercely to regain control of the country.

The corruption that is already rampant in the Karzai government could also be amplified by the new wealth, particularly if a handful of well-connected oligarchs, some with personal ties to the president, gain control of the resources. Just last year, Afghanistan’s minister of mines was accused by American officials of accepting a $30 million bribe to award China the rights to develop its copper mine. The minister has since been replaced.

Endless fights could erupt between the central government in Kabul and provincial and tribal leaders in mineral-rich districts. Afghanistan has a national mining law, written with the help of advisers from the World Bank, but it has never faced a serious challenge.

“No one has tested that law; no one knows how it will stand up in a fight between the central government and the provinces,” observed Paul A. Brinkley, deputy undersecretary of defense for business and leader of the Pentagon team that discovered the deposits.

At the same time, American officials fear resource-hungry China will try to dominate the development of Afghanistan’s mineral wealth, which could upset the United States, given its heavy investment in the region. After winning the bid for its Aynak copper mine in Logar Province, China clearly wants more, American officials said.

Another complication is that because Afghanistan has never had much heavy industry before, it has little or no history of environmental protection either. “The big question is, can this be developed in a responsible way, in a way that is environmentally and socially responsible?” Mr. Brinkley said. “No one knows how this will work.”

With virtually no mining industry or infrastructure in place today, it will take decades for Afghanistan to exploit its mineral wealth fully. “This is a country that has no mining culture,” said Jack Medlin, a geologist in the United States Geological Survey’s international affairs program. “They’ve had some small artisanal mines, but now there could be some very, very large mines that will require more than just a gold pan.”

The mineral deposits are scattered throughout the country, including in the southern and eastern regions along the border with Pakistan that have had some of the most intense combat in the American-led war against the Taliban insurgency.

The Pentagon task force has already started trying to help the Afghans set up a system to deal with mineral development. International accounting firms that have expertise in mining contracts have been hired to consult with the Afghan Ministry of Mines, and technical data is being prepared to turn over to multinational mining companies and other potential foreign investors. The Pentagon is helping Afghan officials arrange to start seeking bids on mineral rights by next fall, officials said.

“The Ministry of Mines is not ready to handle this,” Mr. Brinkley said. “We are trying to help them get ready.”

Like much of the recent history of the country, the story of the discovery of Afghanistan’s mineral wealth is one of missed opportunities and the distractions of war.

In 2004, American geologists, sent to Afghanistan as part of a broader reconstruction effort, stumbled across an intriguing series of old charts and data at the library of the Afghan Geological Survey in Kabul that hinted at major mineral deposits in the country. They soon learned that the data had been collected by Soviet mining experts during the Soviet occupation of Afghanistan in the 1980s, but cast aside when the Soviets withdrew in 1989.

During the chaos of the 1990s, when Afghanistan was mired in civil war and later ruled by the Taliban, a small group of Afghan geologists protected the charts by taking them home, and returned them to the Geological Survey’s library only after the American invasion and the ouster of the Taliban in 2001.

“There were maps, but the development did not take place, because you had 30 to 35 years of war,” said Ahmad Hujabre, an Afghan engineer who worked for the Ministry of Mines in the 1970s.

Armed with the old Russian charts, the United States Geological Survey began a series of aerial surveys of Afghanistan’s mineral resources in 2006, using advanced gravity and magnetic measuring equipment attached to an old Navy Orion P-3 aircraft that flew over about 70 percent of the country.

The data from those flights was so promising that in 2007, the geologists returned for an even more sophisticated study, using an old British bomber equipped with instruments that offered a three-dimensional profile of mineral deposits below the earth’s surface. It was the most comprehensive geologic survey of Afghanistan ever conducted.

The handful of American geologists who pored over the new data said the results were astonishing.

But the results gathered dust for two more years, ignored by officials in both the American and Afghan governments. In 2009, a Pentagon task force that had created business development programs in Iraq was transferred to Afghanistan, and came upon the geological data. Until then, no one besides the geologists had bothered to look at the information — and no one had sought to translate the technical data to measure the potential economic value of the mineral deposits.

Soon, the Pentagon business development task force brought in teams of American mining experts to validate the survey’s findings, and then briefed Defense Secretary Robert M. Gates and Mr. Karzai.

So far, the biggest mineral deposits discovered are of iron and copper, and the quantities are large enough to make Afghanistan a major world producer of both, United States officials said. Other finds include large deposits of niobium, a soft metal used in producing superconducting steel, rare earth elements and large gold deposits in Pashtun areas of southern Afghanistan.

Just this month, American geologists working with the Pentagon team have been conducting ground surveys on dry salt lakes in western Afghanistan where they believe there are large deposits of lithium. Pentagon officials said that their initial analysis at one location in Ghazni Province showed the potential for lithium deposits as large of those of Bolivia, which now has the world’s largest known lithium reserves.

For the geologists who are now scouring some of the most remote stretches of Afghanistan to complete the technical studies necessary before the international bidding process is begun, there is a growing sense that they are in the midst of one of the great discoveries of their careers.

“On the ground, it’s very, very, promising,” Mr. Medlin said. “Actually, it’s pretty amazing.”

Article Source

Quantitative Easing is the only solution to this. It certainly isnt going to be covered from tax receipts.

More printing = higher gold price.

Fannie And Freddie Money Pit May Suck Down $1 Trillion Of Taxpayer Cash

Bloomberg checked in on the state of Fannie Mae and Freddie Mac, the two once-quasi-private mortgage subsidy companies that are now almost wholly owned by taxpayers.  Bloomberg found that Fannie and Freddie have already drawn down $145 billion in their unlimited line of taxpayer credit, and that their losses could ultimately be as high as $1 trillion.

To put that in context, Fannie and Freddie alone may consume more than the entire TARP Wall Street bailout, which was in the neighborhood of $800 billion.  Fannie and Freddie’s taxpayer-money-vaporization will likely dwarf even that of AIG, which most people still consider the most appalling bailout beneficiary of all.

Just as bad, Congress isn’t even pretending that it has a plan to stop the losses at Fannie and Freddie. Reducing the Fannie and Freddie losses would mean reducing a huge housing-market subsidy–and that’s the last thing Congress wants in an election year.

Also, the Fannie and Freddie losses are functioning as a back-door Wall Street bailout: Fannie and Freddie are using the taxpayer cash to buy mortgages from Wall Street, and they are paying prices so high that they’re taking a loss.

It’s certainly tough to decide what SHOULD be done about Fannie and Freddie, because just disbanding them immediately would likely have a negative effect on the housing market and economy.

But it doesn’t seem to much to ask to demand that Congress at least come up with a plan.

Article Source

World Gold Council Q1 2010 Supply and Demand Statistics Report (Years 2007 through 2009)

You can download this report in PDF format here: http://www.research.gold.org/supply_demand/

Observations:

Average mine production over the last 3 years is 2484 tonnes, while average global demand is 3612.1 tonnes.

Miners closing out hedge books continues to subtract from overall global supply, with miners closing 254 tonnes of hedges off their books in 2009 ($9.8 Billion with gold @ $1200)

Official sector sales (Central Bank Sales), has dropped for 3 years in a row, with only 41 tons of sales in 2009. It is important to note, that this area of supply has historically been in the area of 500 tonnes per annum, and Central Banks halting sales of gold leaves a large hole in the supply equation, that is only now being taken up by recycling gold scrap.

The gold scrap industry is booming. From 2007 to 2008, there was a 334 tonne year over year increase in gold scrap recycling, which is roughly $12.87 Billion with gold @ 1200 /ounce. From 2008 to 2009, gold scrap supply increased yet again by another 352 tonnes year over year, which is roughly another $13.58 Billion year over year from 2008. Total gold scrap supply in 2009 was 1668 tonnes.

We have considered that perhaps this is what is paying for those MC Hammer commercials.

Summary:

Overall supply has actually been increasing due to increased scrap recycling and a lower amount of net hedge reduction.

Overall demand for jewelery and industrial (electronics and dental) use has been falling. Total fabrication demand for industrial and use in jewelery has gone from 2882 tonnes in 2007, to 2632 tonnes in 2008, and finally as low as 2132 tonnes in 2009. This continued drop in industrial demand does not reinforce the idea that the US or other economies are in a recovery.

The investment demand category has been consistently increasing year over year, and now is approaching as much as jewelery demand, coming in at 1323 tonnes for 2009.

Official coin sales have increased consistently over the last 3 years, from 134.6 tonnes in 2007, to 187.3 tonnes in 2008, and finally 228.5 tonnes in 2009.

The fascinating thing is the trend in ETF type vehicles, which in 2009 for the first time in history surpassed all other investment demand at 617 tonnes (approximately $23.8 Billion), compared to 472 tonnes for bar and coin retail.

GLD ETF added record tonnage in a single day. According to Adam Hamilton of the Zeal Speculator,

“May 25th, GLD made one of its biggest bullion buys ever. Differential buying pressure on this vehicle from stock investors was so intense that GLD had to add 30.4t,taking its total holdings to 1267.3t.”

This is the equivalent of 977,390 troy ounces, or $1.172 Billion dollars worth of bullion in a single day.

Note: the largest increase in the ETF demand category came in Q1 of 2009, right after the Q4 2008 near collapse of the global financial system. It is possible we will see another large increase following the ECB bailout of the Euro in Q1 2010, although Q1 2010 ETF demand seems to have fallen off a cliff from previous quarters in 2009.

Total investment in nominal terms for 2009 was approximately $51.05 Billion.

Alex’s Notes: I wrote an email to Brett Arends of the Wall Street Journal after he posted this article, to see if he would be interested in discussing what he failed to mention in the article regarding golds role in the modern economic system, and included that it might be useful unless of course he had already made up his mind on the subject and was closed minded, but he never responded. I have to say, I am not surprised.

The Wall Street Journal’s War On Gold

by Gary Northby Gary North

Brett Arends writes for the Wall Street Journal. He is a standard Establishment financial journalist. They are all anti-gold. I have read these people for 50 years. They never change. Their arguments never change: stupid. Their timing never changes: bad.

They ignore gold when it is at the bottom. They ignore it when it has doubled. When it has tripled, they write articles on why it’s not a good investment, because it is overbought. When it has quadrupled, they call it a bubble.

Arends takes anti-gold hackery to a new level. He calls gold a Ponzi scheme.

Gold was $105 in 1976. It peaked at $850 for one day in January 1980. If there was a Wall Street Journal series on why you should buy gold, 1976 to 1979, I do not recall it.

Arends is writing a 3-part series for the Wall Street Journal, which has been anti-gold for all of my lifetime. That the Wall Street Journal runs a series of anti-gold articles is about as innovative as a New York Times editorial opposing a Federal budget surplus.

The case for a gold coin monetary standard is simple: no one should trust the United States government or the Federal Reserve System to maintain the purchasing power of the dollar. Since 1914, the dollar has declined in purchasing power by 96%. As Casey Stengel used to say, you can look it up. Unlike Casey, I’ll show you where to look it up. Here.

The case for gold as an investment is different. First, it is an inflation hedge over long periods of time, though not necessarily in the medium term, e.g., 1980–2001. Second, it is a crisis hedge when the international capital markets are in turmoil. (So, for that matter, is the U.S. dollar.)

Gold is not a deflation hedge. It was for the whole world in 1930–33, when it was a price-controlled commodity that the Treasury would buy for $20 per ounce. It was for central banks and foreign governments, 1934–1971, when the Treasury would buy it for $35 an ounce. It is no longer.

There is a legitimate case against a rising price of gold in U.S. dollars over the next few months, based on the recent move of the Federal Reserve System, in conjunction with the Treasury, to shrink the FED’s balance sheet (monetary base), which has been in progress for the last few months. You can see this here in a chart published by the St. Louis FED.

To understand Brett Arends, you must read his article, line by line. To help you do this, I will provide a running commentary. Note: I took on Milton Friedman on this issue on numerous occasions. Brett Arends is no Milton Friedman.

Let us begin.

A SAD, SAD DAY

The article begins: “This is a very sad day for me.” I hope to make it sadder.

In Part One of this series, when I argued that gold might be about to go vertical, I made a whole bunch of new friends among the gold bugs. And now I’m going to lose them all.

That’s because even though I think gold might be about to take off, I don’t recommend you rush out and put all your money into gold bars or exchange-traded funds that hold bullion.

This is rhetorical trickery. It is indulged in by hacks who have a hidden agenda, but who don’t want to reveal it. It is also indulged in by wishy-washy non-forecasters, who want to cover their behinds when the market goes against them – either way, up or down.

First, he uses the word “might.” “Gold might be about to take off.” He wants to cover his backside when it does. After it does, he can say to any critics, “See? I said it might take off.” Well, whoopdy-doo. The issue is this: “When did you tell people to buy? At what price? And how much?”

I told people to buy in October of 2001, just after 9-11. Bill Bonner, my publisher, told people to buy in 2000. You could buy gold at under $300 back then.

Anyone who recommended gold after it cleared $400 an ounce is a Johnny-come-lately.

Second, notice this rhetorical flourish: “I don’t recommend you rush out and put all your money into gold bars or exchange traded funds that hold bullion”

Hack alert! Hack alert!

He creates a stick man: someone who says to put all your money into gold bullion bars (400 oz). Who is this someone? Who can afford 400 oz bars at $1,200 an ounce?

I don’t know any pro-gold columnist who recommends that you rush out and put all your money in American eagle gold bullion coins.

OK, I did this in 1999. I put 90% of my money into gold coins. I sold half of them when it peaked in the third week of March 2008. I called that peak within 24 hours after the peak at $1,033. I warned my subscribers that gold and silver would fall. This is a matter of public record. Both metals fell. I figured in 2008 that when you make 300% on your investment, and you think it has peaked, it’s time to take some profits. But I never told my subscribers to put 90% of their money into gold. I was crap-shooting in 1999.

I won. Yes, I should have stayed in, but I’m conservative. I go by Jimmy Napier’s rule: “When someone puts a million dollars in your hand, close your hand.” Also, I told my subscribers not to sell their coins, only non-coin gold.

I wonder what Mr. Arends’ track record is with respect to gold. I wonder what percentage of his portfolio is ever in gold or has ever been in gold. I think I know.

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous. Warren Buffett put it well. “Gold gets dug out of the ground in Africa, or someplace,” he said. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Warren Buffett was merely quoting Milton Friedman, who used the identical argument. Friedman hated the idea of a gold standard for most of his career. For a good summary of his war on gold, read Hans Sennholz’s obituary of him.

Sennholz taught me monetary theory in 1962. I have always taken his side against Friedman’s position of fiat money.

Friedman argued that gold as a monetary standard is wasteful. The Wall Street Journal repeated it in an editorial in 1969. I replied to that argument in 1969, in an article titled “Gold’s Dust.” I argued that gold has a major economic function: restraining governments and central banks from inflating. You can read it here.

Warren Buffett has been in a lifetime revolt against his father’s political legacy. His father was the Ron Paul of the late 1940s. There have only been two gold-standard libertarians in Congress over the last century: Howard Buffett and Ron Paul. Warren Buffett has always rejected his father’s position.

So has the Wall Street Journal.

Here is my objection to the Journal: its long-term hostility to the idea of a gold as a legitimate and viable monetary system. This hostility to gold is basic to the acceptance of the modern fractional reserve banking system. It is basic to the acceptance of central banking. It is hostile to the idea that the masses should control monetary policy through a full gold coin standard, which is established by the free market and enforced through the law of contract. The Journal may run an occasional article on gold as a potential money-making investment (money defined as fiat dollars), such as this one, but the Journal has long maintained its support of a fiat money standard.

Arends goes on: “And that’s not the half of it. Gold is volatile. It’s hard to value. It generates no income.” This is another standard cliché against gold. Gold is volatile. Right. So is the stock market. So are commodities in general. So what?

“It’s hard to value.” It is? You mean the commodities market’s moment-by-moment pricing of gold is hard to value?

“It generates no income.” What commodity does?

Land pays no dividends.

Arends knows all this. He offers this as an excuse.

Yes, it’s a “hard asset,” but so are lots of other things – like land, bags of rice, even bottled water. It’s a currency “substitute,” but it’s useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking “facility” still trying to settle their debts with cigarettes. That’s gold. It doesn’t make sense.

Are you beginning to sense that two of this guy would not make a halfwit?

We are not in prison. We are outside prison. If we have gold, we have a marketable asset. It is liquid. Land isn’t. We can sell a tenth-ounce gold coin. How do we sell a bag of rice? How do we sell a carton of cigarettes?

As for being a “store of value,” anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.

Quite true. And anyone who bought it in 2000 has quadrupled his money. Tell me about the Dow, which is down since 2000. Tell me about the NASDAQ, which is way, way down. See for yourself.

Did the Wall Street Journal tell people to get out of the stock market and into gold in March of 2000? No? Did it at least tell them in February and March 2000 that the market was a bubble? I told my subscribers that it was. The NASDAQ peaked the week they received my March REMNANT REVIEW warning them.

I get worried when I see people plunging heavily into gold at $1,200 an ounce. What if the price goes back to where it was just a few years ago, at $500 or $600 an ounce? Will you buy more? Sell?

I can see him, worrying about this. So, so worried. He is about as worried about this as I am about the anti-gold hacks’ pension funds at the Wall Street Journal when gold is at $3,000 and the Dow is at 3,000.

“My concerns about gold go even further than that.” They do? Will wonders never cease! “Let’s step inside the gold market for a moment.” Yes. Let’s.

Everyone knows the price has risen about fivefold in the past decade. But this is not due to some mystical truth or magical act of levitation. It is simply because there have been more buyers than sellers. Banal, but true – and sometimes worth repeating.

Banal, and not at all worth repeating. Banal because the anti-gold hacks never told investors to buy, all the way up. They missed the boat. If these guys knew anything about gold, they would tell readers to buy close to the bottom. They never do. Why pay any attention to them when they say it’s too high?

“More buyers than sellers.” Is this what it takes to earn a paycheck at the “Wall Street Journal”? When it comes to writing hit pieces against gold, it is. It has been for over 40 years.

The relevant question is this: WHY have there been more buyers than sellers (at yesterday’s price)? What has happened in the international markets that persuaded buyers to bid up gold’s price? Did they have a better sense of what would happen to the euro and EU finances than the experts at the “Wall Street Journal” did? (Note: that is a rhetorical question.)

“If the price rises you’d think there must be a shortage.” Not if you understood gold, you wouldn’t.

Most of the gold that has been mined for over 2,000 years is still above ground, either in someone’s vault or on someone’s wife. The marginal increase in production affects the marginal price. The question is not shortage. The question is this: the supply offered for sale to the general public compared to the demand offered by the general public.

If the price rose, then there was more demand than supply at the 2000 price. Or was Adam Smith wrong about this supply and demand thing?

“But data provided by the World Gold Council, an industry body, tell a remarkable story.”

Over that period the world has produced – or, more accurately, recovered – far more gold than anyone actually wanted to use. Since 2002, for example, total demand for gold from goldsmiths and jewelers, and dentists, and general industry, has come to about 22,500 tonnes.

Say, that really is remarkable. All those gold buyers out there were buying more gold than – and I quote – “anyone wanted to use.” That is so remarkable that it calls into question one of two things: (1) economic theory, or (2) the reasoning ability of Brett Arends. You know which answer I select.

“But during the same period, more than 29,000 tonnes has come on to the market.” First, no one knows how much has come on the market through central banks’ gold leasing, which is not reported as sales, when in fact it is sales.

The surplus alone is enough to produce about 220 million one-ounce gold American Buffalo coins. That’s in eight years.

Arends ignores Indians’ purchases. He ignores Chinese purchases. He ignores central bank purchases. He focuses on American coins, which hardly any Americans buy (sadly). The market for gold is the bullion market (central banks), the jewelry market, and the ETF market.

“Most of the new supply has come from mine production. Some, though a dwindling amount, has come from central banks.” He does not know this. GATA has been trying to get this information for 11 years.

And a growing amount has come from recycling old jewelry and the like being melted down for scrap. (This is a perennial issue with gold. I never understand why the fans think gold’s incredible durability – it doesn’t waste or corrode – is bullish for the market. It’s bearish.) So if supply has consistently exceeded user demand, how come the price of gold has still been rising? In a word, hoarding.

Hoarding! The horror! There are people out there who hoard gold. But how many? There are very few coin stores. There are very few active buyers of gold coins. If people are buying 400 oz bars, they are people with a whole lot more money than staffers at the Wall Street Journal possess. They are people who are very rich, very savvy, and with a lot of wealth to protect. They have allocated a small percentage of their wealth in gold bullion.

Mr. Arends, as a salaried writer in a dying industry, thinks of how much gold costs in relation to his salary and his future pension. Gold is so expensive!

Not if you are a Saudi prince, it isn’t.

Gold investors, or hoarders, have made up all the difference. They are the only reason total “demand” has exceeded supply.

Tell me why this principle of demand does not apply to every investment category. He used the word “investors,” as well he should. People buy and hold, hoping the price will go up. What an amazing concept!

Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on.

And are we to believe that this does not apply to every stock, every bond, and every asset reported on by the Wall Street Journal?

This man is treating his readers as if they were economic imbeciles. If his readers continue to take him seriously after reading his article, then they really are economic imbeciles.

What do we call an investment scheme where current members’ returns depend entirely on new money brought in by new members? A Ponzi scheme.

There are hacks. There are also confused people who are in way over their heads. And then there are morally corrupt deceivers.

A Ponzi scheme is an arrangement in which the seller of an investment says that the investment will earn a high rate of return, all on its own. Then he uses the income from later buyers to pay off the early ones. It is totally corrupt. It is fraud. It is also illegal, except when done with the Social Security system and Medicare trust funds.

There can be asset bubbles. They are governed by the greater fool theory of investing. But a bubble is not a Ponzi scheme. Either Arends is morally corrupt or else he is an ignoramus who cannot distinguish a bubble from a Ponzi scheme. You decide.

Yes, as I wrote earlier, gold may well be the next big bubble. And that may mean there is big money to be made in speculation. But I don’t trust it as an investment.

I don’t trust the analytical ability of Brett Arends. I suggest that you retain the same skepticism.

How can you square this golden circle? I’ll tell you in Part Three.

I can hardly wait. I will get another shot at this incompetent hack.

CONCLUSION

In my book, The War on Gold, which I offer for free, I wrote about this sort of anti-gold journalism. I have been at war with it for over 45 years. I will have lots of opportunities to fight more of these battles, hopefully with people of greater intellectual firepower than Brett Arends.

The newspaper industry is dying. Hacks like Mr. Arends will have to find gainful employment doing something more productive. But the war on gold will go on. It will go on for the same reason that it has gone on: a high-level hatred of the public’s attempts to shield themselves from the monetary destruction being engineered by central banks and governments.

For a copy of The War on Gold, click here.

May 29, 2010

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

by Porter Stansberry

What a spectacle…

In an utter and complete repudiation of its founding principles, the European Union’s central bank (ECB) has decided to copy the U.S. Federal Reserve’s 2008-2009 strategy of “papering over” Europe’s massive debt problems. The ECB will provide nearly unlimited credit to Europe’s sovereign borrowers, while also buying troubled assets from Europe’s largest banks.

This latest development has caused a significant change in what I call “the most important chart in the world.”

Readers of my investment advisory are familiar with the chart by now… as we’ve been publishing it nearly every month… and even more frequently in the daily S&A Digest. It shows the value of U.S. government long bonds (NYSE: TLT), the price of gold (NYSE: GLD), and the price of silver (NYSE: SLV).

This is the battle for monetary supremacy… The market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?

The Safest, Most Liquid Form of Money… The U.S. Dollar

For more than 60 years, the U.S. dollar has unquestionably been the world’s safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.

And that’s what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there’s no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold… and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.

The Greatest Single Investment Decision of Your Life

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

Now… let’s look more closely at what the Europeans have done to stave off the collapse of the European Union…

To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to “borrow” roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe’s member states agreed to guarantee these debts, which the ECB claims will be “riskless” because they’re simply loans between central banks.

At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best.

In short, the ECB is going to print up lots of euros and give them to the least creditworthy states and the worst bankers in Europe.

The politicians apparently believe this massive infusion of new money and credit will “jumpstart” the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don’t laugh…

Meanwhile, to ensure this action doesn’t result in a collapse of the euro currency, the Federal Reserve has agreed to open a “swap” line, which will allow the ECB to fund as much of these new “loans” with dollars as is necessary to prevent a run on their currency.

Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued euros, which offer investors almost nothing in interest payments? I don’t think there’s a chance in hell.

The Reason Paper Money Systems Fail…

The reason paper money systems always fail is because they provide no practical limit to credit.

• New currency reserves can always be printed.
• Bad debts – credit defaults – can be “papered over” rather than restructured.

The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.

Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn’t destroy just one or two banks’ house of cards. It wipes out the entire system, which is linked together by the currency itself.

Remember… this just isn’t about problems in far-off Europe. The U.S. is in the same situation: under huge debts we cannot hope to repay.

I recommend you protect yourself by holding real assets… like energy, gold, and silver bullion.

Porter Stansberry

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This video points out exactly how ludicrous the current global economic predicament is:

Very astute observation by Trader Dan over at JSMINESET.

America is headed down the same path as we do the same thing that the Western nations have all been conditioned to do in times of economic crisis – issue even more debt and flood the system with liquidity. Promise government funding for all manner of things such as home buying credits, auto credits, cash for caulkers, cash for golf carts, etc, ignoring the train wreck that is coming our way in the form of entitlements such as Social Security and Medicare. At its current trajectory, US total debt as a percentage of GDP will soon be at levels that have always engendered a currency crisis elsewhere throughout the rest of the world. It then becomes almost inevitable that the giant hedge funds turn their guns on the US Dollar and the US debt market. Once that occurs, the current monetary system as we know it comes to an end. That is when gold will be reintroduced into a new and different monetary system.

The thing that very few consider when trying to determine golds role is that gold is in fact money. It is money just as the USD is, just as the Euro is, just as the Yen is, just as the Swiss Franc is.

The difference between gold as money, and paper as money, is that you cant print more gold at will.

“Foreign nations like to repay their debts with dollars, other foreign currencies, with SDR’s, and with gold, in that order” – Those Swiss Money Men, Vicker 1973

The reason it is “in that order”, is that gold is the ultimate currency, and it is still to this day the reason central banks hold it. If it was such a “barbarous relic” as Keynes claimed, why do central banks still keep it?

They keep it, because they know what it is, regardless of what you are taught in economics class.

To understand golds role in the international economy and monetary system, one only need study Bretton Woods, and what evolved into a global system of currency exchange where all currencies were fixed to the USD and basically “orbited” around it.

The reason the USD could perform this function, is that the USD was fixed to gold at $35 an ounce.

That ended in 1971 when Nixon removed dollar redemption for gold, but it did not change the fact that all currencies still tried to “orbit” the USD even though they ended up floating as they had to in order to maintain any semblance of order with which to conduct global trade against a perpetually inflating dollar.

To understand the role gold plays, all you need to do is ask yourself, if all currencies float, and all currencies inflate, how then do you arrive at any way to measure value since you have no stable point of reference?

The answer is, gold IS the point of reference, it always has been, and until we find a measure of value with no counter party risk that can replace it, it always will be.

I am at this point 100% sure this economic cycle will end with gold playing a fixed role in the next monetary system.

I have noticed two very interesting things this week regarding the MSM.

Gold price shows up now and then on the Bloomberg ticker.

People are openly talking about the benefits of gold on CNBC.

I find it interesting to note, that the host of the show keeps trying to wrap his mind around what role gold performs in the modern economy.

Some people ridicule what he is saying as it points out his ignorance, but what I find more interesting is that he is thinking about it at all.

He uses certain phrases that indicate he doesnt quite grasp what gold is for, such as saying you can bite down on a gold coin and it doesnt really feed you, but cattle on the other hand does.

It shows that people are still not drawing the connection that gold is money, and money is just as necessary for a modern economy the same as food, oxygen, and fuel for your car is.

When people start to click this on, that gold is indeed money (there has never been a time when it hasnt been), and that money is a critical requirement to survive, as much so as oxygen, and then finally that gold is the only money that cannot be created at will (and thus debased at will) – combined with food inflation – this might be the mental trigger that sets off a paradigm shift in culture.

We shall see, it certainly has been interesting to observe.

Thomas Kaplan of Tigris Financial

A Billionaire Goes All-In on Gold

Tigris Financial’s Thomas Kaplan, in his New York office this past week, on his investment focus: ‘I feel the only asset I have confidence in is gold.’

Gold is setting records again, boosting the holdings of central banks, Armageddon worrywarts, and ordinary people who own gold bars, coins and jewelry.

But few individuals stand to benefit as much as low-profile billionaire Thomas Kaplan. A New York-born commodities magnate who earned a doctorate in British colonial history at Oxford, Mr. Kaplan oversees an empire devoted largely to gold.

Many fund managers and high-rollers have allocated small percentages of their portfolios to gold as a hedge against inflation. But Mr. Kaplan is the bull of bullion. He has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. And it reflects his deeply held conviction that global economic instability could bring rising demand for gold.

Through his firm, Tigris Financial Group, and affiliates, Mr. Kaplan has loaded up on bullion and bought up properties in 17 countries on five continents, where geologists are exploring for more. Tigris subsidiaries have taken stakes in mining companies, including tiny firms that have yet to produce an ounce.

Though he won’t disclose how much physical gold he owns, Mr. Kaplan, who is 47 years old, controls up to 30% of the shares in some so-called junior miners. Together, his holdings amount to a nearly $2 billion bet on gold, more than the Brazilian central bank’s bullion is currently worth.

Thomas S. Kaplan
Chairman and chief investment officer of Tigris Financial Group

47 years old

Doctorate in philosophy from Oxford University

Doctoral Thesis Title: ‘In the Front Line of the Cold War’: Britain Malaya and South-East Asian Security 1948-1955

Gold Holdings: nearly $2 billion

Family: married, with two children.

“I’ve reached a point where I feel the only asset I have confidence in is gold,” Mr. Kaplan said in an interview at Tigris’s midtown Manhattan headquarters.

Mr. Kaplan’s views are shaped by a concern, shared by many investors, that heavy government spending hasn’t contained the woes facing the financial system. Gold hit an exchange record of $1,242.70 a troy ounce at the Comex division of the New York Mercantile Exchange on May 12, days after euro-zone leaders announced a nearly $1 trillion bailout for ailing member states.

He has experience with how supply and demand can drive the price of raw materials. His doctoral thesis studied Britain’s involvement after World War II in Malaya, home to prized rubber and tin. That taught him how far people and governments will go to secure natural resources.

Wanting to apply his insights, he went to Israel to advise hedge funds. His nose for finding valuable resources was developed at firms he started that explored for silver and natural gas, which helped him make his fortune.

On Demand and Supply

Gold miners are struggling to make major discoveries and it takes years to bring new finds into production. If people want to stock up on gold in a hurry, it will be hard to ramp up production enough to satisfy them, Mr. Kaplan believes.

“You’ve got a perfect storm with no apparent solution,” he said. “If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine … but a lot of other things could collapse.”

Mr. Kaplan is known in the mining industry for his all-in approach. “When he likes something, he dives in with both feet,” Egizio Bianchini, a banker at BMO Capital Markets in Toronto, said of Mr. Kaplan, whom he has worked with in the past.

In his charitable endeavors, Mr. Kaplan works similarly. In 2006, he co-founded Panthera Corp., whose “single-minded pursuit” is preserving the world’s endangered wild cats, he wrote in an open letter on the group’s site in which he cited inspirational quotes by Winston Churchill, Edward R. Murrow and Marcus Aurelius.

Mr. Kaplan is also president of the board of directors at New York’s 92nd Street Y, a prominent cultural organization that is a magnet for New York’s elite. And he is a benefactor of Eternal Jewish Family, a group dedicated to uniform rules governing conversions to Judaism whose leader resigned last year amid an alleged sex scandal.

In some cases, Mr. Kaplan has invested in gold miners that have also attracted the attention of fellow billionaires, such as George Soros and John Paulson.

Mr. Kaplan put money into one firm, Gabriel Resources Ltd., in late 2007 after Mr. Paulson, who made billions of dollars betting against housing markets, mentioned how low the stock had fallen while they attended “The Nutcracker” at the New York City Ballet.

“I’m there,” Mr. Kaplan recalls was his response.

In early March, Mr. Paulson’s firm, Paulson & Co., and Quantum Partners, Ltd., an investment fund run by Soros Fund Management, invested $100 million and $75 million, respectively, in NovaGold Resources Inc., a Canadian miner, paying $5.50 a share. Their move came a year after Mr. Kaplan, who has $69 million invested in the company, acquired 30% of the firm for $1.30 a share.

Gold prices are up 7.4% this year, after rising 24% last year, which was the ninth straight up year for bullion. Mr. Kaplan thinks that greater gains are coming. “I wouldn’t even say we’re in a bull market yet,” he said.

But Mr. Kaplan has concentrated risk in a volatile sector, and he knows the potential pitfalls better than most.

In 2008, for instance, a company that Mr. Kaplan founded, Apex Silver Mines Ltd., went bankrupt, felled by the terms of a loan made after Mr. Kaplan left the company in 2004. The company emerged from bankruptcy last year, and now operates as Golden Minerals Co.

In January 2009, Mr. Kaplan received a so-called Wells notice from the Securities and Exchange Commission related to what the company said were “impermissible payments” of $125,000 to government officials by executives at a South American subsidiary.

The SEC delivers Wells notices to inform recipients that it may bring an enforcement action, providing an opportunity for the recipient to persuade the agency not to pursue charges. No charges have been filed against Mr. Kaplan. An SEC spokesman declined to comment.

Concentrated Risk

Mr. Kaplan’s current investments also carry risk. Gabriel Resources owns Europe’s biggest undeveloped gold deposit, in Romania, but has been waiting for government approval for years. He has $100 million at stake in the company.

Mr. Kaplan acknowledges the dangers involved in investing in small mining companies. “It’s not the kind of thing I would suggest for widows and orphans,” he said.

And, he added, he isn’t in a rush to cash in on his gold investments. “If I am right about the big picture,” he said, “I will be rewarded for my patience.”

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